BREXIT

What are the consequences of the Parliament’s rejection of the Brexit deal on 15th January 2019?

The UK is not automatically headed for a no-deal exit.

There are several political scenarios that could play out: the campaign in favour of a new referendum is gaining traction, the Parliament could force the Prime Minister to return to the negotiation table; and, last the UK could seek an extension to the Article 50.

Yet, in view of the uncertainty around the outcome of the EU-UK negotiations, pragmatic solutions are being put into place in order to limit market disruptions if there is no deal by 29th March 2019.

In Europe (negotiations between the 27 competent national authorities and with the FCA): hereafter of examples of decisions that shed some light on what the consequences of a no-deal would look like.

Access to the London-based CCPs and CSDs: governed unilaterally by the European Commission through publication of an implementing act in December 2018.

This decision provides for temporary recognition of British CCPs and CSDs for a period of 12 months.

Note that the Commission has not ruled on the recognition of British financial markets. (If some securities were to lose access to their most liquid market, the result could be fragmented liquidity and higher transaction costs. Or, some issuers could abandon dual listing).

The European Securities and Markets Authority (ESMA) and European regulators have drawn up Memoranda of Understanding (MoU) with the Financial Conduct Authority (FCA).

These MoUs are similar to the agreements on the automatic exchange of information already concluded with many third-country regulators. MoUs in place:

a Memorandum of Understanding between ESMA and the FCA concerning the exchange of information in relation to the supervision of credit rating agencies (CRAs) and trade repositories (TRs).

a multilateral Memorandum of Understanding between the EU and EEA market regulators and the FCA on supervisory cooperation, the implementation and exchange of information between each individual regulator and the FCA to enable them to share information in relation to market supervision, investment services and asset management activities, amongst others. This arrangement will allow UK entities to continue to carry out certain activities (such as outsourcing and delegation of fund management) on behalf of EU/EEA counterparties.

As of 7th January 2019, the FCA authorises management companies operating “passported” activities in the UK to notify it of their intention to use the Temporary Permissions Regime (TPR) allowing them to continue to market their funds in the United Kingdom. This notification window is open until 28th March 2019.

On 5th February 2019, ESMA issued a statement on the “Use of UK data in ESMA databases and performance of MiFID II calculations in case of a no-deal Brexit”, setting out the impact of a hard Brexit on ESMA’s databases and the calculation of the transparency thresholds under MiFID II/MiFIR. Because of the uncertainty around the quality of the data that will be collected post-Brexit, ESMA intends to delay publication of some of these thresholds or assessments. This relates in particular to: the thresholds for qualification as a systematic internaliser (SI) for equities and bonds, quarterly determination of the liquidity status of bonds, and the monthly publication of the “double volume cap” (DVC). Therefore, pre-Brexit thresholds or assessments (integrating UK data) will continue to apply for several months in the event a hard Brexit.

In France: The French government has anticipated the consequences of a hard Brexit.

As per Law No. 2019-30 of 19th January 2019, which empowers the government to enact legislation by order to deal with the consequences of a no-deal withdrawal by the United Kingdom from the European Union, Order No. 2019-75 (published on 7th February 2019) includes a range of measures to ensure continuity of financing in the event of a hard Brexit. The main measures are as follows:

Replication of master agreements

With regard to forward financial instruments, European operators that wish to continue their current activities with their UK counterparts will have to use financial service providers authorised to provide services within the European Union. Many British financial institutions have however already taken the initiative of creating European subsidiaries to handle client requests locally so that they can continue to offer these services. This change in contractual relations presupposes however renegotiating existing master agreements between the European subsidiaries and European clients.

Naturally, the renegotiations can be governed either by common law conditions (in other words, <through> </through>

The Order establishes a presumed acceptance regime: its Article 3 provides that the offer of a new master agreement may be deemed to have been accepted by the recipient, provided that certain conditions are met.

Additional arrangements to cover financial contracts (two points in the International Swaps and Derivatives Association (ISDA) agreement under French law may be amended).

Extension of the scope of close-out netting: under the Order, foreign exchange spot transactions (spot FX), the sale, purchase and delivery of precious metals and transactions on CO2 quotas benefit from close-out netting;

Capitalisation of default interest: The Order authorises the parties to capitalise interest (compound interest or “anatocism”), including interest due for a period of less than one year. Recap: this option, which is available to both parties to a derivatives contract, to bill capitalised late payment arrears in the event of non-payment currently only applies to amounts overdue by one year or more.

These two provisions are intended to develop a master agreement subject to French law – for both the French Banking Federation (FBF) master agreement and the ISDA master agreement. These are contingency measures and will only come into effect if there is a hard Brexit.

Interbank settlement and securities settlement systems

UK interbank settlement and securities settlement systems will benefit from the protection provided by the Settlement Finality Directive, as of the date of the UK’s withdrawal.

Asset management

British securities automatically lose their eligibility for inclusion in the assets of UCIs in respect of exposure ratios to European entities (in particular UCIs/PEAs (stock savings plans). The securities of UK issuers and units of UK UCITS will still be eligible* for a period to be set by Order (maximum of 3 years).

* Positions in securities of UK issuers and units of UK UCITS can be maintained, but purchases of such are not authorised (stock savings plans).

Supervision of securitisation activities

The ACPR (supervisory body for the French banking and insurance sectors) retains its powers with regard to securitisation contracts in force afterBrexit.

The AMF is designated as the competent authority for these activities and is given sanctioning, investigative and control powers, including after a no-deal Brexit.